Inflation and employment: is there a third way?

High post-war inflation precipitated a counter reformation in theory from K eynesianism and established the conventional wisdom that a level of unemplo yment existed at which prices stabilised. The policy application of this no tion failed to improve economic performance and, although inflation fell, m ass unemployment and poverty returned. The explanation for this from within the new orthodoxy was that demand and supply conditions in the labour mark et had changed and unemployability explained joblessness. A study of the tr end in import prices suggests, however, that the fall in inflation can be m ore readily explained by falls in import prices and other changes, which re distributed resources from the periphery to the core. This suggests that mo netary control works indirectly on inflation by lowering economic activity and by reducing the bargaining power of the relatively weak. The enormous e conomic and social costs of this suggest that institutional ways of control ling prices offer major benefits.